On Their Own: Advising the Self-Employed

Clients in business for themselves face a host of challenges. How can you best advise clients who already have their hands full making a living on their own?

“We’ve always promoted that a self-employed person needs a retirement plan,” said CPA Timothy Oatney in Lancaster, Ohio. “This can be an IRA (regular or Roth), a Simple plan or an SEP (usually recommended when a client comes in for the first time after Dec. 31.”

“We advise self-employed clients regarding the tax savings of retirement accounts,” said Philip Garofalo, an Enrolled Agent at Preferred Financial Services, in Mays Landing, N.J. “We explain to them that retirement savings should only be considered when the business has expendable profits after paying all employees, vendors and all required taxes.”

“My advice to self-employed and 1099 people is the same as to most anyone: save as much as possible without imposing draconian restrictions,” said Morris Armstrong of Armstrong Financial Strategies in Danbury, Conn. “Depending on earnings, they have the ability to save through Simple IRAs, solo-401(k)s, defined benefit and the SEP. They also need to balance the writing off of expenses versus the contribution to Social Security – the tax that also goes toward their retirement.”

“Being self-employed takes commitment, planning and discipline,” addedGeorgianna Adkins, an EA at Adkins Bookkeeping & Tax, in Van Wert, Ohio. “You are in charge and have no one but yourself to blame when things go south. They need to pay themselves first, because nobody else will do it for them.”

“Start early and start small,” advised EA Kerry Freeman of Freeman Income Tax Service, Anthem, Ariz. “Retirement is a lifetime event and you should build the habits of saving even [in] a small amount. The habit makes the money grow.”

Down-to-earth examples

The self-employed seem to respond well to advice rooted in examples they can quickly understand. “For instance, if you run a beauty salon, the first haircut of the week goes into an account for your retirement or, if you’re in auto repair, the first oil change each week,” Adkins said.

“If nothing else, set up an IRA and start putting money into it,” said Eva Rosenberg, an EA and founder of the blog TaxMama (www.TaxMama.com). “Regardless of how small your contributions are in the beginning, they will grow. You can always increase them along the way. Saving as little as $50 a month for 40 years can be worth as much as $320,000 on the $24,000 investment.”

“We remind the clients they are not getting younger and that Social Security will only replace a small piece of the retirement pie,” said Delmar Gillette of Coastal Tax in Newport News, Va. “We move into a discussion of what type of retirement plan is best afforded by the business, including any contributions for employees, paperwork required by the plan and other time-consuming issues of the plan.”

Jim Loperfido of JGL Management Consulting in Auburn, N.Y., has “a wooden-nickel rule. I try to convince them to save 5 percent each day. In other words, get someone else to pay for their retirement. For instance, if a piece of equipment costs $100, find a way to get it for $95.”

“I inform them of the tax benefits of opening a traditional IRA or funding a Keogh, or the tax benefits of [a Roth] IRA down the road when the money is withdrawn,” said Stephen Anderson, an EA in Carlsbad, Calif. “For an IRA, Keogh or SEP IRA, I can tell them how much of a tax savings they are or aren't getting. For instance, if they contribute X, the tax benefit is Y. Then I give them a percentage. For example, if they contribute $1,000 to a traditional IRA and their total federal and state refunds are going to increase $300, they get 30 percent, or 30 cents on the dollar, of tax benefit.”

“I always ask about retirement plans at tax time and encourage them to go to their local bank and ask about a SEP or IRA,” said Sue Henderson of Bristol Tax and Accounting, Bristol, Tenn. “I remind them that saving for retirement can also reduce their tax liability.”

“Open an IRA with your bank of choice (often easiest to open at the bank where your business transactional accounts are held) and put the current annual limit into the account,” said Darcy Alvarez, a preparer with Liberty Tax in Southern California. “For younger entrepreneurs, I often encourage them by going over the benefits of retirement savings come tax time next year.”

Varied retirement vehicles

“Once they have their payment plan in place for self-employment taxes, they can start planning for retirement,” said Becky Neilson of Neilson Bookkeeping, in Sheridan, Calif. “If nothing else, start a traditional IRA or Roth IRA. Set up a monthly amount to put in an IRA and stick to it.

The self-employed have more retirement tools available than most of them realize. Jeffrey Schneider, an EA in Port St. Lucie, Fla., often recommends SEP-IRAs. “One can give more than 20 percent of their net and there is no cost, as opposed to Keogh plans. There are also plans where you can do a 401(k) or pension plan.”

“My retirement plan of choice is usually the SEP,” said Stephen DeFilippis, an EA at the DeFilippis Financial Group in Wheaton, Ill. “It allows the self-employed individual to contribute a substantial amount and gives them some latitude to exclude employees if they have them. I also look at Simple plans, solo 401(k)s, money purchase and profit sharing plans and IRAs.”

“For single-owner businesses without employees, I always encourage the [solo] 401(k),” said Debra James, an EA at Genesis Accounting & Management Services, in Lorain, Ohio. “If they have employees, I also talk about a regular 401(k) plan if their goal is to save as much as possible for themselves. If they want to find a happy medium, we talk frequently about Simple plans since they are inexpensive to maintain compared with the 401(k), and they and their employees can defer a significant amount of income.”

The preferred plan if the business has no employees is the solo 401(k), Ohio’s Oatney said, “since it is out of reach in lawsuits, and, as a self-employed person knows all too well, when business is slow an infusion of capital might be needed. With this plan, a loan can be made to themselves that can assist in cash flow but will be paid back to their own retirement.”

“If it’s a new business,” Neilson added, “they may not be ready for the 401(k) or SEP programs due to lack of funds. I usually also suggest they consult a financial advisor regarding 401(k)s to make sure they follow the law.”

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